Big blow to rent control

Landlords benefit from state bill that targets 12-year-old East Palo Alto laws

by Don Kazak

The authority to control rents is no small matter in East Palo Alto. This community of 23,452 residents and 4,053 rental units is a city that was founded in 1983 on the principles of rent control. The city's rent control law has been approved by city voters three times.
So it came as a blow last week to city officials--some of whom were preparing for a Thursday night celebration of the city's 12th anniversary--when word arrived from Sacramento that the state Legislature had approved a bill that would essentially gut the city's rent control laws.

SB 1257 will pre-empt some of the strongest local rent control laws in California cities, including those in Santa Monica, Berkeley and East Palo Alto. It still awaits the signature of Gov. Pete Wilson, but that is expected to come with little delay.

The bill, which would become law on Jan. 1, 1996, was opposed by Assemblyman Byron Sher, D-Redwood City, and supported by state Sen. Tome Campbell, R-Palo Alto.

But the news was not somber to all East Palo Altans.

"I'm very happy about it," said Fred Kiani, an apartment building owner and a member of the city's Rent Stabilization Board. "It will realistically allow the owners to collect a little more rent when there is a vacancy, and will allow owners to repair and maintain their buildings."

The main provision of the law is vacancy decontrol: Apartments that become vacant will be removed from rent controls, after a three-year phase-in period. The property owner then can charge whatever the market will support; once a new tenant is in the apartment, its subsequent rent increases are again controlled by the city.

In addition, after a three-year phase-in period, single-family rental homes and condominiums will become exempt from rent control laws when they become vacant. Any home or condo that doesn't have a turnover will remain in the rent control program.

Campbell said he had a difficult time standing up at a town hall meeting in East Palo Alto July 9 and explaining why he supported the bill. "It was hard saying no to a group that intense," he said.

But Campbell believes he made the right vote.

Removing vacancy controls will loosen up money for new construction, Campbell says, which will then produce additional affordable housing.

"This is economics 101," said Campbell, who has a doctorate in the subject. He explained that rent control laws are used as case examples in many economics textbooks as examples of bad public policy because of their effect over time.

"You benefit those who have apartments until they are run-down, and nothing new gets built," Campbell said.

Speaking to the issue of the three public votes for rent control in East Palo Alto, Campbell said, "Normally, I would go for local control. But East Palo Alto's decision affects the housing supply in other cities."

East Palo Alto has 2,700 housing units governed by rent control, including about 150 to 200 single-family homes, said William Webster, a member of the city's Rent Stabilization Board.

Webster, who went to Sacramento to lobby against the bill, has been outspoken about it.

"The impact won't be felt immediately, but it certainly will in time," Webster said.

"The question is whether rent control under vacancy decontrol will be meaningful," Webster said. "The market pressures will be felt very forcefully. (Landlords) will use various strategies to get people out" to charge higher rents.

"I certainly welcome the change," said Frank Burns, who owns a 14-unit building. "(Rent control) almost bankrupted me, and it bankrupted a lot of my friends. A lot of owners are hanging on by a thread."

The number of foreclosures in recent years has worried other property owners, and the change may bring relief for some of them. "Hopefully it will stem the tide of property owners declaring bankruptcy," said Joe Balaty, who has owned an 11-unit building for 25 years.

"They made it very difficult to do business in the city," Balaty said. "It's been hard to evict problem tenants, including drug dealers."

Burns said, "Rent control denies the property owner a fair return on the investment, and that's not fair."

In East Palo Alto, the Rent Stabilization Board has allowed rents to be raised to meet inflation, which has meant average increases of 3 percent a year for the last five years. In addition, apartment owners can petition the rent board for larger increases when making improvements, such as putting on a new roof or installing new carpets.

Kiani said the changes will allow property owners to charge a little more and give them more money to "fix leaky roofs and torn carpets. It will make it a healthier and safer community, and tenants will enjoy that."

Eventually, Kiani said, the changes will increase property values in East Palo Alto, which will produce more tax revenue for the city, which will then be able afford to pay for more services for residents.

But those changes may be gradual. Because of the phase-in, and also because of the rental market, the new law "will take a considerable length of time" before it produces any changes, Burns said. Both Kiani and Burns say they know of no apartment building owner who is now even charging as much rent as the rent board allows.

"The market won't allow it," Kiani said. The U.S. Census showed that the median monthly rents in East Palo Alto climbed from 1980 to 1990 from $258 a month to $530 a month.

"Properties in Mountain View, Los Altos, Palo Alto and Menlo Park are much more desirable," Burns said. He said the turmoil the city went through in 1992 and 1993 still has an effect. "That stigma is still with us," he said.

"The bottom line is the market will decide these rents," Kiani said. "The markets will keep the rents down."

Balaty said he wishes he had sold his building several years ago. First, property values leveled off or even went down as vacancies on the west side of East Palo Alto increased and the buildings deteriorated. Then the city's street traffic in drugs turned very violent, with 42 homicides in 1992 and the accompanying notoriety as "the homicide capital" of the country.

"In hindsight, it would have been smart to sell," Balaty said. "But who knew how bad things were going to get?"

The new law may lead to the displacement of low-income tenants by others who can afford to pay a little more rent. Burns welcomes that displacement, or gentrification. "Gentrification may bring about some relief for property owners," he said.
But Webster isn't happy about that possibility.

"As the economy improves, East Palo Alto will look more like Palo Alto through gentrification," Webster said. "There is no debate over this. It will happen in a big way in East Palo Alto, which has prime real estate."

Others also fear for the future of the city's low-income tenants.

"Poor people are being hurt," said Vice Mayor Sharifa Wilson. Welfare reforms in Washington and now state action will both affect many of the city's residents, she said.

Wilson, Webster and other rent control advocates met with Campbell in the July town hall meeting to complain about his vote for SB 1257 by Sen. Jim Costa, D-Fresno. It was a version of that bill, AB 1164 by Phil Hawkins, R-Artesia, that was passed by the Assembly last week and now awaits Gov. Wilson's signature.

Webster told Campbell last month that he was ignoring the wishes of his East Palo Alto constituents by voting for the bill, especially since city voters have approved rent control three different times.

Sharifa Wilson, who went to Sacramento to speak out against the bill, also told Campbell she was unhappy with his vote. "I told him I was disappointed," she said. "He did not use any statistical information from East Palo Alto, just from Santa Monica and Berkeley."

A widely quoted study showed that those two cities have lost rental housing units since rent control was enacted. But no such thing has occurred in East Palo Alto. In fact, what little statistical information exists shows the number of rental units may have increased since rent control was approved by East Palo Alto voters in April 1984.

"Each city is unique and has unique housing needs," Wilson said. "It's not fair for the state to make a law that applies to an issue as close as housing. It's really a local issue."

East Palo Alto, meanwhile, isn't certain what it will do, Wilson said, but probably has no option but to comply with the new law, which will take effect on Jan. 1.

The City Council has asked City Attorney Mike Lawson to analyze the likely impact of the bill on the city.

Berkeley and Santa Monica are also bracing for the new law, said Lenny Goldberg, a housing advocate who represents several rent-control cities in Sacramento.

The cities will be looking out for landlords who want to take advantage of the vacancy decontrol by "encouraging" vacancies. "Rent control programs will have to strictly monitor evictions and harassment," he said. "There's a lot of ways to 'game' the system to get full market rents."

Goldberg thinks that the effect of the law will be a loss of affordable housing, especially in high-priced Santa Monica, but also to some extent in Berkeley. Now, he said, landlords will be more interested in renting to shorter-term tenants, like college students, so apartments turn over periodically and enable them to increase the rents, instead of to older people or families with children.

Apartment owner groups in Sacramento have been trying to get a rent control pre-emption bill passed for more than a decade. Even though they've succeeded in the Legislature, they're still fighting on other fronts.

R.S. Radford, of the Pacific Legal Foundation, has been fighting rent control for several years. His firm has four lawsuits in progress--against Berkeley, Santa Monica, Cotati and Escondido--all at the trial courts.

"We're still following up with the legal challenges," Bradford said. "What the legislature does one year can be undone the next."